Investor Fears Grow That Once-Hot Telecom-Gear Sector Has Cooled
Dow Jones Online News, Thursday, October 01, 1998 at 01:40
(Published on Wednesday, September 30, 1998 at 22:36)
By Stephanie N. Mehta, Staff Reporter of The Wall Street Journal
Concerns are growing that the once-booming market for
telecommunications equipment is slowing.
Northern Telecom Ltd. warned this week that it will record
lower-than-expected third- and fourth-quarter revenue. That revelation,
along with French gear maker Alcatel SA's disclosure a few weeks ago
that it won't meet 1998 earnings expectations, has fueled fears that the
entire industry is cooling -- and it has led many investors to drop
companies that were considered white-hot just months ago.
In New York Stock Exchange composite trading Wednesday, Nortel shares
continued to slide, plunging $3.8125, or 11%, to $32.0625. Rival Lucent
Technologies Inc. saw its shares fall $5.25, or 7%, to close at $69.25.
Motorola Inc. shares slid $1.6875 to close at $42.875. And Alcatel's
American depositary shares fell $1.0625, or 5.9%, to $17.
Many analysts believe the Nortel and Alcatel disclosures underscore
broader problems for the industry. Continued consolidation among
telephone companies -- the equipment makers' main customers -- could
lead to reduced capital spending. The big boom in wireless
infrastructure spending, prompted by the deregulation of the U.S.
cellular industry, is beginning to slow. And some of the most promising
overseas markets for gear makers, Asia and Latin America, are roiled by
economic woes.
"It's going to be harder for the entire industry to sustain growth
rates," said Nikos Theodosopoulos, an analyst with Warburg Dillon Read.
Mr. Theodosopoulos Wednesday downgraded his rating on Nortel to a "hold"
from a "buy," and also lowered ratings on three smaller equipment
makers. "Investors really need to focus not on all boats rising, but on
companies that are gaining market share."
That's a change from a year ago, when the
telecommunications-equipment sector was the darling of Wall Street.
Investors believed that deregulation of U.S. and European markets would
create huge opportunities for equipment makers as new carriers sprung up
and existing phone companies rushed to upgrade their networks to fend
off the upstarts. The shift to Internet-based networks, away from
traditional telephone systems, was seen as an additional factor driving
equipment spending.
Gear makers insist that those opportunities still exist. Richard
McGinn, chairman and chief executive officer of Lucent, said businesses
and consumers remain hungry for phone lines, Internet connections and
other telecom services, prompting spending by Lucent customers.
"We're seeing carriers are moving forward and making investments to
take advantage of the opportunities and enhance their positions," Mr.
McGinn said Wednesday in an interview. He added that he "is not
uncomfortable" with analysts' fiscal 1998 estimates of about $30 billion
in revenue and earnings of about $1.70 a share for the Murray Hill,
N.J., company. Lucent was spun off from AT&T Corp. two years ago and has
been a favorite of investors ever since.
Lucent executives dismissed fears of a capital-spending slowdown by
customers. "We are engaged in very detailed planning discussions with
service providers all over the world," said Carly Fiorina, president of
the company's global service provider business. "The primary demand is
strengthening over time, not weakening."
But even widely held Lucent isn't impervious to worries about a
slowdown in the overall gear market. The stock is down 36% from its
52-week high of $108.50 a share. Wednesday, investment firm BT Alex
Brown lowered its rating on Lucent to "market perform" from "buy," and
Warburg Dillon Read's Mr. Theodosopoulos lowered his price target on the
stock, citing concerns about the overall outlook for the industry.
In a research note in late September, Alex Brown predicted that the
telecom equipment sector would grow a paltry 4% in 1999, compared with
13% growth in 1998. The firm's analysts warned of flat capital spending
by the big, incumbent telephone companies. Indeed, an Ameritech Corp.
spokesman said Wednesday that the company expects 1999 capital spending
of about $3 billion, "about the same" as this year's.
Emerging carriers, meanwhile, such as the competitive local carriers,
aren't likely to offset slower spending by the big guys. Local phone
competition hasn't taken off as quickly as some had predicted, resulting
in less spending by new players.
Yet many investors and analysts remain optimistic about the sector.
After all, concerns about spending by phone companies cropped up at this
time last year, only to be dispelled.
Even skeptics concede that there remains a strong opportunity for
gear makers that can help carriers install systems based on Internet
technology to transmit huge streams of voice, video and computer data.
However, those equipment makers will have to contend with stiff
competition from computer-networking players such as Cisco Systems Inc.
and Ascend Communications Inc.
"The question is whether the catalysts that cause carriers to spend
are still around, and I think the answer is yes," said Alex Cena, an
analyst with Salomon Smith Barney. "This is definitely more of a speed
bump than a pothole."
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